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On today’s TSX Breakouts report, there are 14 stocks on the positive breakouts list (stocks with positive price momentum), and 32 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that appeared on the positive breakouts list at the beginning of the month with its share price closing at a record high at the end of the third quarter. The company has a solid track record of delivering revenue growth combined with a stable dividend. The company highlighted below is Morneau Shepell Inc. (MSI-T).

A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

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The company

Toronto-based Morneau Shepell is a human-resources consulting and technology provider offering services such as employee and family assistance programs, retirement and benefits administration.

In terms of geographical revenue breakdown, last quarter 72 per cent of the company’s revenue was derived from Canada, 23 per cent from the U.S., and the balance, 5 per cent, was from international regions. Revenue breakdown by product offering was as follows: 43 per cent from well-being services, 30 per cent from pension and benefit outsourcing services, 14 per cent from retirement solutions, and 13 per cent from health and productivity solutions.

The company has delivered revenue growth over the years. To illustrate, Morneau Shepell reported revenue of $365-million in 2011, $419-million in 2012, $471-million in 2013, $536-million in 2014, $567-million in 2015, $592-million in 2016, $625-million in 2017, and $722-million in 2018. Furthermore, the high recurring revenue model provides the company with earnings stability and visibility.

After the market closed on Aug. 8, the company reported solid second-quarter financial results that sent the share price soaring over 8 per cent the following trading day. Revenue came in at $212.7-million, up 24 per cent year-over-year and ahead of the consensus estimate of $210-million. The company’s top line growth was a blend of organic (internal) and acquisition growth. The LifeWorks acquisition was a material contributor to the revenue growth. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $45.9-million, up 36 per cent year-over-year and in-line with the consensus estimate. The adjusted EBITDA margin strengthened to 21.6 per cent, up from 19.7 per cent reported during the same period last year.

On the second-quarter earnings call, president and chief executive officer Stephen Liptrap provided a positive outlook for the company, “In closing, a few general words about the years ahead. We expect our Canadian business to keep producing growth in the mid-single digits, with double-digit growth expected in new technology products, the United States and in emerging markets.”

Consistent with this solid outlook for growth in its U.S. operations, on Aug. 7, the company announced that it completed the US$58-million acquisition of Mercer’s U.S. large market, health benefits and defined benefit pension plan administration business. Management anticipates this purchase will represent roughly 12 per cent of the company’s annualized revenue. This business has EBITDA margins in the low-to-mid teens, below the company’s margins. In terms of potential margin expansion of this acquired business, on the earnings call, chief corporate officer Scott Milligan indicated that he sees a “little bit of upside…but there’s not a lot, that’s sort of where the business is.”

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The company will be reporting its third-quarter earnings results on Tuesday, Nov. 5 and will be hosting an earnings call the following day at 9 a.m. (ET).

The Street is expecting revenue to be $218-million, EBITDA to come in at $45.4-million and the earnings per share estimate is 15 cents.

Dividend policy

The company pays shareholders a monthly dividend of 6.5 cents a share, equating to 78 cents per share a year, or a current annualized yield of 2.45 per cent.

The dividend has been maintained at this level since 2011. Last quarter, the payout ratio stood at 53.9 per cent of its normalized free cash flow.

Analysts’ recommendations

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This stock with a market capitalization of $2.06-billion is covered by four analysts, of which two analysts have buy recommendations and two analysts have neutral recommendations.

The firms providing research coverage on the company are as follows in alphabetical order: CIBC World Markets, National Bank Financial, Scotiabank, and TD Securities.

Revised recommendations

In September, TD Securities’ analyst Graham Ryding increased his target price by $2 to $36.

In August, Stephanie Price, an analyst at CIBC World Markets, lifted her target price to $35 from $32, as did Jaeme Gloyn of National Bank Financial.

Financial forecasts

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The consensus revenue estimate is $878-million in 2019, rising 13 per cent to $992-million in 2020. The Street's is forecasting EBITDA to come in at $185-million in 2019, climbing 14 per cent to $211-million in 2020. The consensus earnings per share estimates are 59 cents in 2019 and 94 cents in 2020.

Expectations have increased for this year and next year, driven by the acquisition of the Mercer’s stand-alone U.S. business. For instance, three months ago, the Street was forecasting revenue of $840-million in 2019 and $900-million in 2020, and EBITDA of $183-million in 2019 and $203-million in 2020.

Valuation

According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA (EV/EBITDA) multiple of 12.5 times the 2020 consensus estimate, which is above its three-year historical average of 11.4 times. Over the past three years, the stock has traded at a forward EV/EBITDA multiple as high as approximately 13 times.

The average one-year target price is $35, implying the share price may increase 10 per cent over the next 12 months. Individual price targets are as follows in numerical order: $34 (the low on the Street is from Scotiabank’s Phil Hardie), two at $35, and $36 (the high on the Street is from TD’s Graham Ryding).

Insider transaction history

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Year-to-date, only two insiders have reported transactions in the public market.

On Aug. 20, chief commercial officer of the company’s U.S. operations Neil King sold a total of 2,844 shares at an average price per share of approximately $32.60 across two accounts.

That same day, Luc Bachand, who sits on the board of directors, invested over $130,000 in shares of the company. He purchased 4,000 shares at a cost per share of $32.62, increasing his portfolio’s position to 9,000 shares. Mr. Bachand was the former vice-chairman and head of BMO Capital Markets in Quebec.

Chart watch

The long-term stock chart is attractive with the share price remaining in an uptrend.

Year-to-date, the stock is one of the best performing stocks in the S&P/TSX industrials sector index, rising 27 per cent, above the sector’s return of 16 per cent.

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At the end of the third-quarter, on Sept. 30, the stock price closed at a record high of $32.96 on solid volume. Over 260,000 shares traded that day, above the three-month historical daily average trading volume of approximately 180,000 shares.

Looking at key technical resistance and support levels, the stock’s next major ceiling of resistance is around $36. Should the share price retreat, there is strong technical support around $30, which is just above its 200-day moving average (at $29.30).

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Positive BreakoutsOct. 18 close
DOO-TBRP Inc $56.00
CHW-TChesswood Group Ltd $10.29
EFN-TElement Fleet Management Corp. $10.85
EQB-TEquitable Group Inc $109.36
EXF-TEXFO Inc $5.48
GCG-A-TGuardian Capital Group Ltd $25.59
NA-TNational Bank of Canada $67.41
OSB-TNorbord Inc $34.59
NWH-UN-TNorthWest Healthcare Properties REIT $11.99
PKI-TParkland Fuel Corp $45.93
POW-TPower Corp of Canada $30.67
TCN-TTricon Capital Group Inc $10.79
VCM-TVecima Networks Inc $9.60
WFC-TWall Financial Corp. $25.95
Negative Breakouts
ATD-B-TAlimentation Couche-Tard Inc $39.02
ALO-TAlio Gold Inc. $0.79
ADW-A-TAndrew Peller Ltd $13.16
ATH-TAthabasca Oil Corp $0.52
BAD-TBadger Daylighting Ltd $36.90
CDAY-TCeridian HCM Holding Inc. $58.84
DOL-TDollarama Inc $46.33
ECA-TEncana Corp $5.35
FAH-U-TFairfax Africa Holdings Corp. $6.06
FRU-TFreehold Royalties Ltd $6.63
GIL-TGildan Activewear Inc $34.53
GMP-TGMP Capital Inc $2.16
GTE-TGran Tierra Energy Inc $1.33
MEQ-TMainstreet Equity Corp $59.75
MTY-TMTY Food Group Inc. $52.01
MTL-TMullen Group Ltd $7.42
NWC-TNorth West Co Inc $27.98
OSK-TOsisko Mining Inc. $2.94
PSI-TPason Systems Inc $14.73
PSK-TPrairieSky Royalty Ltd $15.32
RECP-TRecipe Unlimited Corp. $24.00
QSR-TRestaurant Brands International Inc $90.72
SMF-TSEMAFO Inc $4.06
SCL-TShawCor Ltd $13.80
SOY-TSunOpta Inc. $1.78
FIRE-TSupreme Cannabis Co Inc. $0.84
SGY-TSurge Energy Inc $1.04
TVE-TTamarack Valley Energy Ltd. $1.66
TMD-TTitan Medical Inc $0.68
TGL-TTransGlobe Energy Corp $1.64
WED-TWestaim Corp. $2.38
YGR-TYangarra Resources Ltd. $1.26

Source: Bloomberg

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